Retirees in These 12 States May Lose Some or All of Their Social Security Benefits.

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Saving for retirement is difficult, and Social Security benefits can help bridge the gap between what you have saved and what you need to live comfortably in your senior years.

However, there is a hidden cost that could reduce your Social Security benefits. Additionally, if you live in one of the 12 states, you may not receive the full amount each month.

Social Security Benefits

 

TAXES AND SOCIAL SECURITY

Even after retirement, you may still owe Uncle Sam a portion of your income. Not only are 401(k) and traditional IRA distributions taxed, but so are Social Security benefits.

You may owe state and federal taxes on your benefits. State taxes vary by state, but the good news is that the vast majority of states do not tax Social Security benefits. The following states tax your monthly payments:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • Mexico Nuevo
  • State of Rhode Island
  • Utah Vermont
  • West Virginia

If you live in a state that does not levy a Social Security tax, you are not yet exempt. Regardless of your residence, you may still owe federal taxes on your benefits.

Your federal taxes are calculated using a figure known as your combined income. This is calculated by multiplying half of your annual benefit by your adjusted gross income. Thus, if you receive $20,000 in Social Security and $30,000 in 401(k) distributions, your combined income would be $10,000 plus $30,000, or $40,000.

The good news is that it is possible to completely avoid paying federal taxes. However, because the income limits are so low, you’ll need a combined annual income of less than $25,000 (or $32,000 if married) to avoid paying federal taxes on your benefits.

 

HOW TO SAVE MONEY ON TAXES DURING RETIREMENT

Taxes are frequently an unavoidable expense that workers must plan for in retirement. However, there is one trick that may help you save money on taxes: investing in a Roth IRA.

Roth IRA withdrawals are already tax-free, but this account type may also help you avoid paying taxes on your Social Security benefits. Withdrawals from a Roth IRA are not included in your total income. Therefore, if the majority of your income comes from a Roth account, you may be able to avoid paying federal taxes entirely.

For instance, if you receive a $20,000 annual Social Security benefit and withdraw $30,000 from a 401(k) each year, your combined annual income is $40,000 — which means that up to 85 percent of your benefits will be subject to federal taxes.

On the other hand, suppose you continue to receive $20,000 annually from Social Security but withdraw $30,000 annually from a Roth IRA rather than a 401(k) (k). In this case, your combined income is less than $10,000 per year, and 0% of your benefits are taxable.

Not everyone will be able to contribute to a Roth IRA, which is perfectly acceptable. If you have all of your retirement savings in another type of account or are eligible for matching contributions through a 401(k), you may be better off sticking with your current retirement account. However, it’s never a bad idea to be aware of your options.

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Taxes are a fact of life for the majority of people, and it’s prudent to begin planning for them now. By determining which taxes you may owe and budgeting for them, you can avoid unpleasant Social Security surprises in retirement.

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